DB or not DB? That is the question.
Should I stay or should I go?
30 Jan 2017 - Estimated reading time: 2 minutes
DB or not DB? That is the question. Ok, so it’s not quite Shakespeare, but that really is the question that many DB pension scheme members are facing. Since the introduction of Freedom and Choice in April 2015, DB members have increasingly been considering whether they can cash out their DB pension to take it flexibly. This is evident from the number of people transferring which roughly doubled in the year following the arrival of Freedom and Choice.
But a DB pension offers a pension for life, no matter how long you live, so why would a DB member transfer? A question I’ve asked myself with some frustration as someone who joined the workplace too late to enjoy the golden era of DB. And yet, despite this frustration, a question to which I can see some clear answers.
Freedom and Choice does exactly what it says on the tin. In the words of Ultra Nate, when it comes to your pension, you’re free to do what you want to do (subject to any legal constraints…). There are any number of reasons that a DB member might want that flexibility. Be it Steve Webb’s Lamborghini fund or the trip of a lifetime to the Galapagos Islands which my parents smugly recounted in great detail, it’s clear to see why “New Age Pensioners” might want to access their cash when they want.
And why wouldn’t they? By the time you reach retirement you’ve typically paid off the mortgage, put the kids through school and have access to free transport, right? Oh, and that thing you spent the last 40 plus years saving for (your retirement) is here. So all in all, you’re spending less. Do you really need all of that DB pension, or can you take some now as cash and have fun? Well, that all depends on your personal circumstances. A pensioner with a property portfolio in London as a result of investing in the right place at the right time will probably be able to make do without that DB pension. Their tenant may not.
Even then, you may be fit, healthy and debt-free in the prime of your retirement, but how long are you going to live? And sorry to say it but, what long term healthcare needs will you have? Anyone with glass-half-empty grandparents will know that pensioners often underestimate how long they might live for. And whilst you may not want to think about it, as many of us don’t, private healthcare doesn’t come cheap. Taken together, there’s a real risk of running out of money in retirement and becoming reliant on the State Pension; a fate I wouldn’t wish on anyone and a fate avoidable by staying in DB.
With the media sensationalising pension freedoms and employers increasingly educating staff on their options, we expect even more people to transfer over time. Add to this high profile cases such as BHS and Tata Steel planting the seeds in DB members’ minds that their pensions may not be quite as guaranteed as they previously thought they were and the “real” possibility of high inflation eroding DB pension benefits. You end up with the key dilemma for DB members approaching retirement: should I stay or should I go?
On 3 May we hosted a joint webinar with Pinsent Masons, LV= and ITS Limited to discuss how you can help support your DB members in making good retirement choices.